Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
A Budget that compromises the fisc - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

A Budget that compromises the fisc
Mar 9, 2015

The growth assumptions are ambitious and the rise in expenditure excessive

Hosannas are being sung for Arun Jaitley's Budget of great aspirations. It is well packaged and bears the stamp of credibility.

There are concerns about some of the key fiscal indicators and some measures. Measures in the social sectors should benefit the masses if well executed.

Fiscal indicators

The fiscal consolidation path to attain a target of a gross fiscal deficit (GFD) of 3 per cent of GDP has been elongated by a year. With the revised GDP numbers, an assessment has become difficult.

The Budget is based on a nominal GDP growth of 11.5 per cent in 2015-16.The new series estimates real GDP growth for 2014-15 at 7.4 per cent and the Budget projects real growth in 2015-16 at 8.0-8.5 per cent, which generates a breathtaking vision of double digit growth on the anvil.

While it is good to have aspirations of higher growth rates, unrealistic aspirations, without the concomitant higher savings to meet the higher investments, would only point to a sinister nemesis lurking around the corner wherein real growth falls precipitously. Consistency of projections would require an implicit inflation target in 2015-16 of 3.0-3.5 per cent. Obviously, the agreement between the government and the Reserve Bank of India would not indicate such a low target.

Since the nominal GDP is very large relative to the GFD, small variations in the GDP growth can have a big impact on GFD-GDP ratio. The GFD-total expenditure ratio in 2015-16 is projected at 31.3 per cent which should ring alarm bells. Again, the revenue deficit accounts for 71 per cent of the GFD which is of concern.

Underlying the Budget assumptions is the acceleration of growth but there is little assurance that the return on financial savings would be improved.

On the contrary there is an overbearing emphasis, in influential quarters, to reduce the returns on financial savings. The fact that the reduced inflation rate implies that negative returns on financial savings are in the positive zone is no solace for savers. The bottomline is that unless the return on financial savings is made more attractive, savers would continue to veer towards physical savings.

Tax-free infrastructure bonds

The introduction of tax-free infrastructure bonds for projects in the rail, road and irrigation sectors proposed in the Budget is commendable. Invariably, a good part of the year is spent in sterile debate on the modalities of these schemes, and markets could be in turmoil towards the end of the year, and finally the proposed issue of bonds does not take place.

A more serious problem is that the yield curve is inverted with short rates being higher than long rates. The analytics of the term structure of interest rates is that the long rate should be the average of the anticipated future short rates, adjusted for risk and uncertainty. The main reason for the inverted yield curve is that we start with the assumption that borrowing is unviable at market-related rates and therefore, long rates should be low. If money is to be raised for 10-15 years, the rate on such bonds should be 7.5-8.0 per cent tax-free. While the government is not obligated to buy back these bonds, there should be no curbs on secondary market trading.

Resolution corporation

The government intends to set up an independent Public Debt Management Agency (PDMA). The danger of prematurely setting up such an agency, without the prerequisites being met, has been discussed in detail in a number of earlier columns. The PDMA cannot remain in swaddling clothes and expect the RBI to bail it out. The RBI should not have a member on either the PDMA council or the management committee, especially as the mandate of the PDMA is to have unanimous decisions and that money should be raised at low rates. With an independent PDMA, the RBI should have unfettered freedom to run its open market operations exclusively to meet monetary policy objectives and not provide a feeding bottle to the PDMA.

Again, while setting up the Resolution Corporation, deposit insurance for banks should be kept totally out of it. If deposit insurance is within the Resolution Corporation, deposit insurance funds for banks would be misused to bail out financial companies. In India, by the time the Resolution Corporation intervenes, the financial companies would be empty shells without any net assets.

Monetising gold

A path-breaking measure in the Budget is the announcement of the Gold Monetisation Scheme and a Sovereign Bond as recommended by the KUB Rao Working Group. It is unfortunate that the setting up of a gold bank, which was announced in the Union Budget of 1992, was subverted in a cloak and dagger operation.

We have lost almost a quarter century in developing this scheme. It is fervently hoped that we will learn the lessons of history and not commit the same mistake and hopefully the Budget proposal will be fully implemented during the course of 2015-16.

The Sovereign Gold Bond would require the investor to invest rupees which the government (or its agency) would buy domestic gold and on-lend it to users of gold. The bond could have a seven-year maturity and carry an interest rate of 5 per cent (tax-free).Under the Gold Monetisation Scheme the depositors would place gold with the concerned authority and there should be a reasonable minimum lock-in period, say a year.

The interest rate on this scheme should be 7 per cent (tax-free) which should be credited in metal to the holder's account. On maturity or withdrawal the investor would be paid in gold. This would disgorge very large hoards of gold. If the measure proposed is implemented it would make the Budget for 2015-16 a watershed in fiscal history.

Please Note: This article was first published in The Hindu Business Line on March 06, 2015.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "A Budget that compromises the fisc". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Is Your Bank Gambling With Your Money? These Banks Should be Declared Dangerous... (Profit Hunter)

Jul 17, 2018

Tanushree Banerjee bets you would not want to leave your money with these unsafe banks...

Your Rescue Plan from the Cave of Poor Quality Stocks (The 5 Minute Wrapup)

Jul 17, 2018

And there will be no getting trapped with Amtek, Vakrangee, or Manpasand like stocks.

2019 Lok Sabha Elections and the Perils of Populism (Vivek Kaul's Diary)

Jul 17, 2018

Evidence from around the world shows that populism can only lead to more populism and this is clearly not good news for the Indian economy.

More Views on News

Most Popular

The Real Truth About India's FDI, Beyond WhatsApp(Vivek Kaul's Diary)

Jul 4, 2018

The FDI numbers do not look very impressive once we adjust for repatriations as well as the overall growth in the economy.

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 17, 2018 03:37 PM